The Renewables Boom Could Be in Danger

Over the past year, renewable energy, particularly solar, has boomed. As the price of solar panels has dropped, investments in solar technology have skyrocketed—the solar industry installed more solar capacity in the first half of 2011 than it did in all of 2009, according to the Solar Energy Industries Association. The wind industry isn’t putting up turbines as quickly as it was a couple of years ago, but it still represents the largest source of new renewable energy in the country: this year has seen the installation of more than three times the wind capacity than the solar industry produced in 2010.

If renewables are going to make a real impact toward decreasing carbon emissions, these trends need to continue, or even accelerate. To stop climate change, the country needs hundreds of gigawatts of solar; California just made it to one gigawatt. But the country faces a real risk of the growth of wind and solar slowing, instead of continuing to speed up.

Although electricity from renewable energy sources is getting cheaper all the time, investors aren’t yet convinced they can turn a profit from solar or wind investments without at least some support from the federal government. The most important source of that support comes from tax credits—a system that allows renewable energy investors to write off a portion of their investment.

In the wind industry, growth tracks closely with these credits: When they’re in place, the number of projects being built surges; when the government takes them away, fewer projects come online. The tax credit for wind projects is slated to expire next year. Companies only receive the credit once they’re finished a new installation, though, and because projects often take longer than a year to finish, the prospects for new wind projects next year are already looking grim.

Solar projects qualify for the credit until 2016, but they stand to take a hit next year as well. For the past three years—since the beginning of the recession—the solar industry has benefited from a provision that converted tax credits into a tax grants, worth 30 percent of the project’s cost. Congress began this program because dwindling profits during the recession meant investors had less need for a tax credit. The grant made solar an attractive investment and helped drive this year’s boom. At the end of the year, it will revert back to a tax credit.

The solar and wind industries are lobbying likemad to change the course of these policies, but if neither is extended, renewable projects will likely become less popular investments. That will also mean that state-level renewable policies will matter all the more. California has built a gigawatt of solar in part because the state has set ambitious goals for solar installations and used state resources to encourage them. The federal solar tax grant inspired the New Jersey solar industry to build more solar projects than the state’s incentive program had anticipated, temporarily skewing incentives for investors. But because the New Jersey program will continue in some form, it will continue to attract investment, and neighboring New York may create a similar program. Some states have passed renewable energy standards, which require utilities to buy a certain percentage of their power from renewable sources. Other have feed-in tariffs, which help guarantee that renewable projects will be able to sell their power at a rate competitive with coal- or gas-fired plants.

State policies like these will help ensure that investments in renewable energy projects won’t disappear altogether in 2012. And on a smaller scale, creative ideas for financing solar projects can continue to push renewable energy. But renewable energy needs to grow as fast as it can, and next year, there’s a chance it won’t.